If you've been reading the news you'll be aware that there is a chance, however small, that we are teetering on a precipice overlooking the most extreme financial collapse since the Depression. Were the current debt ceiling negotiations between the White House and the House Republicans to fail, and were the U.S. government to default on its bonds, then the resulting economic collapse would be truly cataclysmic. A U.S. default would destabilize banks around the world, create a new worldwide recession far worse than 2008, and lead to such an extreme collapse in GDP that it would take decades for America to recover.
There is really no way of overstating how bad this outcome would be.
Were this economic Armageddon to occur it is hard to imagine that there wouldn't be blood flowing in the streets somewhere in the world, maybe somewhere closer to home than usual, and those conflicts would further damage the world economy. This is clearly not something anyone desires or can accept, and so the world press is watching nervously as our Congress slowly creeps towards disaster.
Given that this potential death sentence is merely days away a person might be surprised to see that the Dow is still above 12,000, that there have been no bank runs, and that the only people stockpiling ammunition are those who have been doing so since we elected a man they believe to be a radical Muslim. If a catastrophe is coming then it seems that no one expects it. That wouldn't be unprecedented, no one thought June of 1914 was going to end as it did either, but it would be very surprising.
As the post's title alludes I do not think that we should be particularly worried about the worst case scenarios the press has imagined. This is not because I believe that a default would be good for the American economy as some badly misguided individuals claim. I remain unconcerned because I do not believe that this nuclear bomb will ever be detonated. A reader might think this position to be overly sanguine. Given the development of the current debate and the persistent intransigence of the Republican party such incredulity is excusable. There is, however, a persuasive case to be made that the worst will not come to pass. I will make that case here.
The first thing to remember is that Republican politicians have an electoral incentive to appear to be as obstinate as possible. After 2010 Republicans are aware that their base voters are both angry and highly motivated. Many of them are also very ignorant, even to the point of believing that a government default would be a genuinely positive thing. Republicans aren't worried about losing these votes in general elections, Tea Partiers aren't going to switch parties, but such people are the population that is very important in Republican primaries.
What the Republican party leadership is genuinely worried about is the possibility that primary challenges will unseat competitive candidates and replace them with unelectable nutbags. This has already happened. 2012 looms large in their planning. A candidate like Mitt Romney has a real shot at winning the Presidency. Someone like Michele Bachmann does not; her name is toxic with too many independent voters and her stated positions are so extreme that she lacks real credibility. She is the Pat Robertson of 2012, capable of a strong showing in the Iowa primary but totally unrealistic nationwide. The party leadership needs to inoculate itself against talk radio accusations of ideological infidelity so that the voter base does get upset enough to promote unelectable candidates like Bachmann. This is accomplished by delaying compromise on the debt limit until the last possible minute; the party needs to be able to tell its voters that they did not back down lightly.
The other reason why the Republicans might allow an agreement is that failing to do so could hurt them badly in 2012. The people in power now remember Newt Gingrich's mistake in 1996, when a government shutdown damaged Bob Dole in the general election. No one wants to repeat that experience. Least of all Senate Minority Leader Mitch Mconnell, who was kind enough to honestly explain the political implications: "They want to blame the economy on us. The reason that default is no better an idea today than when Newt Gingrich tried it in 1995 is that it destroys your brand and would give the president an opportunity to blame us for the bad economy. Look, he owns the economy. He’s been in office nearly three years now. We refuse to let us entice us in to co-ownership of a bad economy."
It also should be remembered that none of the vested interests the Republican party relies on for support could accept a default. The Chamber of Commerce and the Koch brothers have more to lose than most in the event of a real disaster. Business people are rarely so ideologically committed that they are prepared to accept things that would destroy their ability to do business; those who have the most at stake financially are also those least willing to support a political party whose actions lead to economic collapse.
If the only thing preventing catastrophe on August 2nd was the ability of Republican leaders to stand up to Tea Party pressure then my confidence would not be anywhere near as firm as it is. The other factor that can potentially stop a default is Barack Obama's unilateral action. The treasury secretary is a member of the Executive branch. If we reach August 2nd with no deal in sight Timothy Geithner has the practical ability to continue signing the government's checks. The Constitutionality of this would be unclear, but the Administration could argue that since the Congress has already passed a budget it has given the Executive implied permission to borrow the money necessary to meet that budget.
I am not a constitutional lawyer and I cannot vouch for the validity of that argument, but it is plainly the case that in practical matters such as this the Constitution does not mean anything. No matter however well loved it may be it remains a piece of paper. It cannot itself act. The courts charged with enforcing it are themselves very slow and are often reluctant to act for it. After all, we've been deploying air strikes in Libya and attempting to kill a formerly recognized head of state for months now while the Administration argues that Congressional approval is unnecessary because these efforts are not properly defined as 'hostilities.'
The Obama administration has the same ability to take licenses with the Constitution in this case, and if it came down to a choice between allowing a new global depression and offering a potentially weak legal argument I fully expect that they would choose the latter. There would be politicized outrage, but in 2012 Obama could go to the electorate and tell them that even though he had offered a deal consisting of $3 trillion in cuts and $1 trillion in new revenue the Republicans were unwilling to accept the closure of a few tax loopholes and instead preferred to court an unprecedented financial collapse. I I expect he would get the better of that argument.
One way or another our politicians will prevent the debacle of default. The open question is how that will be done and who will benefit or be harmed politically. I look forward to seeing how it plays out. In the mean time though, I'm not about to lose any sleep over these negotiations. Even if an economic Apocalyspe remains a small possibility, there are so many inexplicably bad choices that would have to be made by reasonably competent people that expecting disaster remains a paranoid view.
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